Small businesses are the most affected when it comes to funding. Most investors see them as risky, making available funding and obtaining loans inaccessible to small businesses. This is why small businesses seek alternative funding options, peer-to-peer lending, and crowdfunding to finance their dreams and operations. Below are eight alternative financing options small businesses can explore to succeed in their operations.
What Is Alternative Funding?
Investors define alternative funding as approaches businesses use to gain financing outside of known and traditional funding options like bank loans or venture capital. These funding options don’t consider factors like credit history, collateral, or assets to give businesses funding.
8 Alternative Financing Options for Small Businesses
Here are 8 alternative financing options small businesses can explore among the many that exist:
Crowdfunding benefits small businesses during product launches and is a great way to test markets. Small businesses can use crowdfunding platforms like Kickstarter and Indiegogo for a financial boost. Through the platforms, small businesses pool small patches of investments from several investors rather than a single investment source.
2. Peer-to-Peer Lending
Also referred to as social lending, peer-to-peer lending is where small businesses (or owners) lend and borrow financing to and from other businesses or individuals. It is the simplest alternative funding model because you can do it offline with a community of businesses or businesses individuals or on online platforms that serve as pitching platforms. It benefits already-started small businesses more than startups.
3. Angel Investors and Venture Capitals
Venture capital and angel investments are people or firms willing to fund small businesses and startups for a return, such as a share in profit or a share of the business’s equity. There is a difference between the two. A venture capital (VC) is a company (large and established) seeking to pump capital into a small business in exchange for equity.
On the other hand, an angel investor seeks to invest in an early-stage business or startup that cannot demonstrate the growth a VC may want. VCs and angel investment apply to industries like tech, fintech, and disruptive ventures.
4. Non-Bank Fintech Lenders
A key alternative to traditional bank loans is the non-bank fintech lenders. This focuses on fintech small businesses. Fintech lenders function solely online and typically provide smaller credit options, loans, or lower barriers to market entry. Some known fintech lenders are Kabbage and PayPal.
5. Alternative Investment Funds
Alternative investment funds (AIFs) have successfully filled the void with traditional banks in financing small businesses. Multiple investors pool resources and give AIFs to offer accessible, flexible capital to small businesses. This democratization of funding fosters small enterprise growth, enabling everyday individuals to access business funding.
6. Buy Now, Pay Later
The Internet’s advantages have arrived at small businesses beyond reaching the market. Small businesses can buy now, and pay later to help them get funding, overcome the challenging financial and economic outlook, and reach merchants and customers. In this arrangement, customers pay in installments of up to 12 months while merchants get paid within 48 hours, solving both sides’ cash-flow issues and helping small businesses grow.
7. Business Credit Cards and Payday Loans
Now, businesses can get small business credit cards with as low as 0% rates that last up to 18 months. Business owners can get these credit cards, or their owners can get e-transfer payday loans to access instant funding for their operations.
8. Pitch competitions
Entrepreneurs and small business owners have always participated in pitching competitions to raise funds. Pitch competitions often require a business to be located within a particular region, be within a cohort of entrepreneurs, or be at a particular revenue stage. Pitch competition funding is particularly beneficial for established businesses looking to grow.
Small businesses with challenges in getting traditional funding find solace in alternative funding. These alternative funding options are accessible and cheap, helping small businesses sort out their financial and operation needs. However, as a small business, you have to do accurate research and choose an alternative funding model that fits within your company.